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On December 1, 2016, Parker Hannifin Corporation and CLARCOR Inc. announced that the companies have entered into a definitive agreement under which Parker will acquire CLARCOR for approximately $4.3 billion in cash, including the assumption of net debt. The transaction has been unanimously approved by the board of directors of each company. Upon closing of the transaction, expected to be completed by or during the first quarter of Parker’s fiscal year 2018, CLARCOR will be combined with Parker’s Filtration Group to form a leading and diverse global filtration business. Bass, Berry & Sims has served CLARCOR as primary corporate and securities counsel for 10 years and served as lead counsel on this transaction. Read more here.

September 28, 2015

Several recent False Claims Act ("FCA") settlements involving health systems leave little doubt that physician compensation is squarely within the enforcement agencies' crosshairs. The allegations in these matters offer important lessons for hospitals to consider in structuring their physician compensation arrangements. At the same time, the settlements' size demonstrates the high stakes involved if the arrangements are structured incorrectly.

U.S. ex rel. Payne, et al. v. Adventist Health 1

On September 21, 2015, Florida-based hospital system Adventist Health System-Sunbelt Inc. ("Adventist") agreed to pay a record-setting $118.7 million to settle allegations that it violated the FCA by maintaining improper physician compensation arrangements under the Stark Law and Anti-Kickback Statute.

The relators, in two parallel qui tam actions, alleged that Adventist instituted a corporate policy encouraging its hospitals to purchase physician practices or employ physicians to control patient referrals for both inpatient and outpatient services and boost the hospital's revenues. To convince the physicians to sell their practices or become hospital employees, Adventist hospitals allegedly provided the physicians and their employees with excessive compensation, perks and benefits. For example, a family practitioner was paid a $366,000 base salary – more than double the salary of similar practitioners in that area. The complaint explains that the high salary was due to the extraordinarily high level of the physician's facility fee referrals to Adventist for x-ray and laboratory tests. Adventist also allegedly ignored a 2012 fair market value survey that flagged 50 physician compensation arrangements as potentially not being commercially reasonable.

Adventist's scheme to control referral revenue through employed and contracted physicians was allegedly made clear through a "pattern of economic trade-offs" where the hospital was willing to pay above fair market value compensation to physicians and absorb persistent losses because the hospital captured the referral revenue generated by those physicians. Specifically, "year after year, Defendant Hospitals with employed physicians lose large sums of money on most (and, in some cases, all) of the physician practices that those hospitals own," and that "[a]s stand-alone ventures, the Hospitals' physician practices were generally not viable." In e-mails, the Adventist CFO indicated that Adventist expected the physician practices to lose money and would therefore, include in budget reports a section to "add back the physician loss" to determine each hospital’s profitability before the losses on the physician practices were considered. The CFO also emailed a spreadsheet summary of this data comparing the physician practice losses to the Hospital contribution margins to all Adventist corporate employees acting as administrators at Adventist Hospitals.

In its press release announcing this record-breaking settlement, the Department of Justice warned "would be violators" to "take notice" that the Department of Justice "will use the False Claims Act to prevent and pursue health care providers that threaten the integrity of our healthcare system and waste taxpayer dollars" by promising to "continue to investigate such wasteful business arrangements."2

U.S. ex rel. Reilly v. North Broward Hospital District3

On September 15, 2015, the Department of Justice announced a $69.5 million settlement with North Broward Hospital District, a special taxing district of Florida that operates hospitals and healthcare facilities in and around Broward County (collectively, "Broward"). Similar to Adventist, this qui tam case alleged that Broward was liable under the FCA for providing excessive compensation in violation of the Stark Law and Anti-Kickback Statute. Specifically, the complaint alleges that Broward deliberately recruited, employed and agreed to pay physicians excessive compensation based in part on anticipated profits from referrals from such physicians to Broward hospitals and clinics. Broward also actively monitored and tracked these referral profits in secretive "Contribution Margin Reports." If the value and volume of referrals did not offset the high compensation, Broward allegedly pressured physicians for increased referrals to Broward hospitals and clinics.

Specific examples of losses from the secretive "Contribution Margin Reports" included that the employed orthopedic surgeons were on pace to generate losses of $4.9 million in FY2011. The complaint also alleged that the compensation paid to employed physicians exceeded the 90th percentile and that the compensation to collections ratio (which exceeded a 1:1 ratio) was double that of the 90th percentile. In its press release announcing the settlement, the Department of Justice highlighted its continued focus on physician compensation arrangements noting that "our citizens deserve medical treatment uncorrupted by excessive salaries paid to physicians as a reward for the referral of business rather than the provision of the highest quality healthcare."

U.S. ex rel. Barker v. Columbus Regional Healthcare System Inc.4

On September 2, 2015, the U.S. Attorney's Office for the Middle District of Georgia reached a settlement with Columbus Regional Healthcare System ("Columbus Regional") and Dr. Andrew Pippas, a medical oncologist employed by Columbus Regional’s cancer center. The settlement resolved alleged FCA violations based on upcoded claims and Anti-Kickback Statute and Stark Law violations. Columbus Regional settled for $25 million, plus up to $10 million in contingency payments.

The complaint alleged that Columbus Regional paid Dr. Pippas more than twice the amount of the collections and revenue Columbus Regional received for the services he personally performed. The Department of Justice explained that "the only way [this compensation arrangement] makes sense is if [Columbus Regional] determined his compensation by indirectly calculating the financial benefits to [Columbus Regional] of the designated health services (DHS) Dr. Pippas referred to the Defendant." In addition to his clinical compensation, Dr. Pippas also received a stipend of $300,000 for two medical directorships. Nearly half of the oncologists employed by the cancer center served as medical directors, calling into question the need for duplicative services and the commercial reasonableness and necessity of the directorship arrangements. And, despite getting multiple valuations indicating that Dr. Pippas was being compensated above the 90th percentile, the parties continued under this arrangement. Dr. Pippas defended his compensation arrangement saying that his DHS referral value to Columbia Regional was in the millions, and he was being under-compensated, not over-compensated. He settled individually for $425,000.

Takeaways

In light of these recent settlements and the promise of future enforcement by the Department of Justice, these settlements should be carefully analyzed as cautionary examples of arrangements that may subject hospitals to increased scrutiny. Notably, these settlements come on the heels of the June 9, 2015, fraud alert entitled "Physician Compensation Arrangements May Result in Significant Liability" ("Fraud Alert") where the Office of Inspector General ("OIG") warned healthcare providers, including physicians, that it would hold them accountable for participating in arrangements that the OIG views as shams to disguise kickbacks, especially sham medical director arrangements.5

Going forward, hospitals and health systems should carefully scrutinize any potential physician arrangement to ensure that it is structured appropriately and is for a legitimate business purpose unrelated to potential referrals. Healthcare providers also should consider obtaining a reputable outside valuation to assist in confirming fair market value and commercial reasonableness, and providers should document the business need for all arrangements. The inquiry should not end there. Hospitals and health systems should also periodically review their existing physician arrangements to ensure that each arrangement remains compliant with the Stark Law and Anti-Kickback Statute. If concerns are uncovered while reviewing existing physician compensation arrangements, they should be carefully analyzed to determine if self-disclosure or other remedial actions are necessary.

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